FPSO delays hit 1Q; tankers to see 2Q lift
? 1Q22 core net profit was below expectations at 13%/19% of our/consensus
FY22F forecasts, due to FPSO Mero-3 construction cost overruns.
? AET’s tanker earnings should see a large uplift in 2Q22F, and we reiterate
our Add recommendation on the basis of this re-rating catalyst.
? Nevertheless, we lower our SOP-based TP to RM8, as we raise the Mero-3’s
capex costs and factor in a lower contribution to MISC’s SOP value.
FPSO Mero-3 cost provisions weighed down 1Q22
1Q22 core net profit of US$87m w as 23% lower qoq, due mainly to cost provisions for the
FPSO Mero-3 construction project that is progressing slow er than expected and w ith cost
overruns. MISC already made some cost provisions for the Mero-3 in 4Q21, but the
provisions w ere likely higher in 1Q22, though the amounts w ere not disclosed. Another
key reason for the weaker qoq performance is because during 4Q21, MISC booked in
upfront finance lease profits from the extension of several FPSO projects in the normal
course of business, which did not recur in 1Q22. Also, MISC refinanced RM3bn of its
project finance debt via the issue of US$1bn medium-term notes, which caused it to
expense off US$11.4m in upfront financing fees in 1Q22. Partially offsetting the above
negatives are better LNG profits qoq due to low er maintenance expenses, and MMHE’s
recoupment of certain Covid-19 cost items from its clients, as w ell as the absence of
kitchen-sinking provisions at MMHE in 4Q21 for foreseeable contract losses.
FPSO Mero-3 project delays are our main concern…
The key concern that w e have with respect to MISC is the FPSO Mero-3 project that it is
undertaking at the CIMC Raffles yard in Yantai, China for charter to Petrobras over 22
years. As at end-Apr 2022, the Mero-3 w as 40% completed vs. the targeted 44%,
representing a 3-month delay, with capex costs having overrun by 5-7% due to
engineering delays, yard delays caused by China’s Covid-19 lockdown, and commodity
price inflation, according to MISC. MISC awarded the project to CIMC Raffles in Jan
2021, with just 18 months to go before the deadline for delivery to Petrobras by late2023F. In our view , it may be difficult for MISC to deliver the project on time and within
budget; we raise our capex estimate from US$1.8bn to US$2.2bn, which reduces its
contribution to MISC’s target price. The downside risk to MISC is that should it be
necessary to make additional cost provisions, its quarterly earnings may be affected. We
are also unsure if Petrobras will impose late-delivery penalties in 4Q23F or FY24F.
…but tanker rates should perform better in future quarters
On the bright side, A ET should report healthy quarterly profits from 2Q22F onwards, on
the back of much stronger crude tanker freight rates. A ET merely broke even in 1Q22 as
it had greater 35% spot exposure in 1Q22 vs. 29% in 4Q21, and it faced negative VLCC
TCE earnings in 1Q22 (positive in 4Q21). VLCC TCE rates recovered to positive territory
in 2Q22F, while suezmax and aframax TCE rates rose sharply too. A ET usually benefits
with a lag, and w e are confident of AET’s performance going forward.